By David B. Wilkerson

Netflix Inc. (NFLX) is facing increased pressure from Hollywood studios at a time when the online DVD rental pioneer's stock sits near record-high levels - a fact that has made some on Wall Street cautious.

Warner Bros. Home Video, a unit of Time Warner Inc. (TWX), said last week that it would enter into negotiations with owners of DVD-rental kiosks, such as Redbox, and subscription-based mail order DVD rental providers such as Netflix that may revise the terms of the revenue-sharing agreements they have with the studio.

Analysts believe that Netflix should be able to come to reasonable terms with Warner Bros., which has the largest video catalog among the major studios.

Warner Bros. wants companies like Redbox and Netflix to wait 28 days after a DVD is released to the public before offering it for rental. Netflix, which also makes some movies available for download from the Internet, is also being given the option of a "day-and-date revenue sharing" arrangement.

The studio has also asked wholesale vendors not to sell Warner Bros. discs to Redbox and Netflix; from now on, Warner will sell its discs directly to the rental providers.

While this may put some pressure on Netflix, analysts point out that the company serves a different customer than Redbox, which operates automated kiosks that rent out DVDs for a $1 per night. The bulk of Redbox's business comes from new releases, while about 70% of Netflix rentals are back-catalog releases.

"In our view, Netflix seems better positioned to negotiate more favorable content access terms because of its ability to monetize the long-tail of back catalogue content," George Askew of Stifel, Nicolaus & Co. wrote in a note to clients Monday.

Analyst Michael Pachter of Wedbush Morgan Securities agrees. "Netflix has a lot more leverage than Redbox because they deal in both new and catalog titles," he said. "It's not that Warner Bros. is afraid of Netflix, but they're a major customer, and Warner has to respect that."

Premium Valuation

The main pressure on Netflix may stem from its premium valuation.

Unlike many other stocks, which remain well below their levels at this time last year before the massive market sell-off, Netflix shares have been on a roll. The stock is up 45% from its levels at this time last year.

In April, the stock neared the $50 mark - an all-time high, on a split adjusted basis. While the shares have wobbled some, they remain in the $40-$45 range.

At their current level, shares of Netflix trade at 22 times estimated earnings for the next four quarters. That's well above the valuations of the media giants who make the movies that Netflix rents out, and is even a small premium to Internet giant Google Inc. (GOOG).

"Notwithstanding solid Q2 results, we think that upside in the shares will be limited for the remainder of the year," Pachter of Wedbush wrote in a July 24 report, in which he downgraded the stock to a neutral rating.

Much of Wall Street is cautious on the stock. Out of 28 analysts covering Netflix, 12 have neutral ratings and another seven rate the shares as a sell, according to data from Thomson Reuters. Nine analysts maintain buy ratings on the stock.

"At its current valuation of 26x fiscal year 2009 EPS vs. its peer group's 15x, we believe that the market is pricing in accelerating outperformance," wrote analyst Mark Harding of Maxim Group, who rates the stock as a sell.

The Redbox challenge

According to Pachter, the recent move by Warner Bros.' is primarily about Redbox.

Redbox, owned by Coinstar (CSTR) has installed thousands of its kiosks, which charge $1 per day for movie rentals, at supermarkets, Wal-Mart (WMT) stores, 7-Eleven (SVNDY) outlets, and many other places with significant foot traffic.

Twentieth Century Fox (NWS)(NWSA) and Universal (GE) have also imposed one-month delays on Redbox's offering of their movies for rental.

By forcing Redbox to wait, the studios hope to force consumers to rent new release DVDs at other outlets that charge higher rates.

"Redbox is teaching consumers that $1 is a fair price for a movie rental," Pachter said. "And the studios don't like that."

For a basic monthly subscription rate starting at $4.99, Netflix customers go online to select DVDs, which are delivered via first-class mail, including postage-paid return envelopes.

In the second quarter, Netflix's average revenue per user fell to $13.29 from $13.78 in the year-ago period, suggesting that consumers are leaning toward the company's lower-priced subscription packages. Along with the $4.99 plan, which allows customers to take out just one DVD at a time, other budget-priced plans include an $8.99 subscription that allows one DVD plus access to downloadable movies and TV shows.

Not everyone is convinced that Netflix's talks with Warner Bros. are of little concern.

"This is our first indication, in recent years, of studio frustration with payment terms from Netflix," said Barton Crockett of Lazard Capital Markets, who rates Netflix as a hold. Crockett said the news is "cautionary" for Netflix investors.

-David B. Wilkerson; 415-439-6400; AskNewswires@dowjones.com